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Edition #20 | February 2022

Digital payments: Navigating the complexity and understanding the customer impact

For businesses and consumers alike, digital payments have quickly transitioned from an innovation to an everyday reality.


The fact that they’re not just here to stay, but will flourish and increasingly displace cash as a medium of value, has been underlined by their elasticity amid the economic uncertainty of the last couple of years. During the global downturn caused by the pandemic, digital payments registered only a slight dip, and are set to bounce back to hit nearly US$3 trillion by the end of the decade.


Digital payments: Accelerating out of the pandemic

Source: BCG


What’s more, digital payments growth and adoption is a genuinely global phenomenon. Despite disparate market conditions, technology infrastructure and regulatory regimes, new payment solutions are just as likely to emerge, and spread, from Asia or Africa as the corridors of Silicon Valley.  Markets like China and Singapore are increasingly perceived as leading the way in areas like central bank digital currencies and real-time, cross-border digital remittances.  


Adoption is only set to pick up, as both consumers and companies grow more accustomed to the conveniences afforded by digital payments, interact with different points of purchase and explore the new services and possibilities that emerge. "Everybody in the system is maturing: service providers, consumers, and retailers,” notes Prashant Gandhi, Principal, Financial Services at Thoughtworks. “In countries like India and Australia, regulators are also busy creating new payments infrastructure. All those forces are joining to lead the acceleration.”


As Thoughtworks experts point out, this shift isn’t just making transactions faster or more efficient – it’s altering their nature, and the ways in which people interact with money. “The replacement of traditional debit or credit cards with things like ‘buy now, pay later,’ products means the point of purchase for many consumers is now completely different,” notes Ian Kelsall, Product Principal for Banking, Financial Services and Insurance (BFSI) and Fintech, Thoughtworks. “Greater convenience and options are changing how consumers structure their payments, exchange funds and receive goods. And not just consumers, we’re seeing this in the business sector as well.” 


“Payments have always been about exchanges of value for goods, but are no longer necessarily an explicit action,” agrees Gandhi. “If you’re making a payment on a website like Amazon, you’re not even typing in your credit card information because it’s already stored and tokenized. All that’s left is a notification on your phone. It’s special in the sense that it’s becoming more and more invisible. Consumers aren’t seeing what’s actually happening behind the scenes anymore.” 


These trends will require enterprises of all stripes to consider how they structure commercial interactions with customers, partners and suppliers, and their optimal place in an expanding digital payment ecosystem. The stakes are high, as not all digital payment solutions or strategies will prove transformative, or even relevant, for an organization. Yet failing to keep up with or adopt the right ones may mean alienating current or potential customers, or missing out on new sources of value.



i. How the payments ecosystem is evolving


The first thing that inevitably confronts any institution evaluating the digital payments space is its complexity. Consumers, governments, banks, fintechs and other enterprises are all driving development – at times, in different directions – and attitudes and expectations are in a constant state of flux. 


Consumers are of course the primary end-users, and ultimate arbiters, of most payment solutions. The desire for efficiency, seamless experience and safety, particularly in the wake of COVID-19, has made digital payments the preference of most shoppers. In the UK for example, cash payments plunged 35% in 2020, while the number of people claiming to lead a “cashless life” doubled. A study in the Eurozone suggests consumers are flocking to digital payments primarily for reasons of convenience, rather than health concerns.


This means freedom to move between various payment providers or gateways, and services or infrastructure that reduce costs or create efficiencies are becoming the expectation, rather than a selling point. 


Fintechs were among the early responders to this call and continue to raise the bar for convenience and service in areas like cross-border payments. “The pioneer was PayPal, which emerged when fintech wasn’t even a word,” notes Nikhil Joshi, Director, Financial Services, Thoughtworks. However, banks have responded to customer demands – and the erosion of parts of the business model – with their own offerings and innovations in their own right.


“The entire revenue stream of banks has been threatened, so they’ve had to find new ways to compete,” says Gandhi. “They’ve had to look past utility services to identify where they can use their existing entrenchment in the value chain to provide more cohesive, consistent services to customers.” 


Photo headshot of Prashant Gandhi, Principal, Financial Services, Thoughtworks
“The entire revenue stream of banks has been threatened, so they’ve had to find new ways to compete.”


Prashant Gandhi
Principal, Financial Services, Thoughtworks

While banks and fintechs are often portrayed as rivals in the payments space, the reality is more nuanced. “At the end of the day, what’s happening is convergence,” Joshi says. “There are different ways they go about it, but whether through partnerships, acquisitions, or other means, banks are becoming fintechs, and fintechs are becoming banks.” 


As Thoughtworks experts see it, multiple forces make this convergence inevitable, and banks and fintechs essentially interdependent. Banks have massive incumbent advantages that are difficult, if not impossible, for fintechs to emulate. For certain transactions, or at certain stages of growth, fintechs inevitably depend on bank infrastructure, and banks are all but guaranteed to enjoy a near-monopoly on certain processes and services – at least for the time being.


“There’s regulatory arbitrage that banks can take advantage of,” notes Joshi. “They have the systems, KYC processes, the scale, highly secure standards and setup across continents to support large, global transactions. Business-to-business financial services is a bank-dominated space.” 


Photo headshot of Nikhil Joshi, Director, Financial Services, Thoughtworks
“At the end of the day, what’s happening is convergence. Banks are becoming fintechs, and fintechs are becoming banks.”


Nikhil Joshi
Director, Financial Services, Thoughtworks


At the same time, being less constrained by regulation, internal capital allocation mechanisms or legacy infrastructure, gives fintechs more freedom to experiment. “In areas like lending, fintechs are able to look at alternative data sets, come up with novel ways of thinking about individual needs, and tap into spaces that are generally unprofitable for banks dealing with huge balance sheets and huge capital outlays,” says Gandhi. “Working with an individual or a small business might not be worth a bank’s time – but for a fintech, it will be.”   


As regulators grow more open-minded, banks adopt modern digital infrastructure, and fintechs get increasingly ambitious, we're seeing all of these players moving into the same space. 


“If you think about services like digital foreign exchange, traditionally this would be something large banks would spend an awful lot of time building themselves, whereas now we’re seeing them offer solutions like Wise (formerly TransferWise) as an embedded service,” notes Kelsall. “Some interesting questions arise out of that – like what services should a bank focus on that it’s going to be really good at, and what should it just partner to provide because a service built in-house would be expensive and difficult to differentiate?”


Gandhi notes banks have become increasingly willing, even eager, to work with fintech partners, and are busily investing in the cloud-based infrastructure and APIs that make such collaborations easier. 


“(Banks) are well aware of the trends and want to make the right kinds of acquisitions at the right time,” he says. “They also encourage a lot of innovation. Some have dedicated innovation centers where they actually invite fintechs to team up with them for a period of time, and if they can demonstrate through a proof of concept that there’s a useful technology, that technology gets adopted.” 


Similar trends are evident in the other direction, as fintechs begin to approach bank scale. Joshi cites crypto exchange, Kraken, as a case in point. “They’re as fintech as it can get, but applied for a dozen different state licenses to be a banking entity, because they realized that there are two things fintechs can enjoy by being banks – the ability to hedge their assets, and to move into areas traditionally dominated by banks, like debit cards and consumer lending. Meanwhile banks are trying to get into non-traditional consumer payment and financing mechanisms that they’re seeing fintechs enjoy.” 


This trend is evident in the rush of digital-only banks launched by incumbents -  such as JPMorgan’s Chase Bank in the UK, Standard Chartered’s Mox in Hong Kong and LINE Bank in Indonesia, backed by South Korea’s Hana Bank - competing with new tailored services such as microlending and increasingly versatile installment payment mechanisms.  


Adding to the opportunity – and complexity – are the growing number of non-bank and fintech businesses offering their own payments infrastructure and solutions, from credit card companies, to tech giants like Google and Apple. Indeed in some markets the dominant payments players have emerged from outside of the financial services industry. In China over 90% of people use WeChat Pay, developed by tech giant Tencent, or Alibaba’s Alipay as their primary payment methods, with cash and credit/debit cards a distant second and third, respectively. Usage of bank apps also pales in comparison – even though many third-party solutions ultimately depend on bank or existing payments infrastructure. 


Chinese consumers’ preferred mobile payment platforms

Source: Daxue Consulting / Payment & Clearing Association of China


Regulators will have a major say in how these trends evolve, since in services like cross-border payments, “technology has never been the bottleneck – it’s regulations,” says Joshi. “And not every regulator moves at the same speed. There's been a mindset among some governments that if they make their standards open they’ll be swarmed by technologies from elsewhere. Countries in Africa and Asia that have adopted digital payments really well have shown that with minimum protections in place, you can allow inter-border commerce to flow freely and come up with a meaningful taxation structure.” 


Kelsall sees signs that regulators are beginning to push back against the dominance of large companies in the digital payments space. 


“It’s interesting to see how in different countries concerns are emerging about monopolistic global players putting themselves in place,” he says. “There’s mounting pressure in markets like Australia to prevent dominance of the likes of Apple or Google being able to shape the market just because they have control at the point of purchase, and regulators have started to take a stance against that. It’s a trend any organization getting into payments needs to start thinking about.”


The interactions of, and initiatives being pursued by, all these various players means the digital payments market is likely to remain complicated, and fragmented – but also that it will continue to offer companies ample space to experiment with, or adopt, promising new services and solutions.   



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ii. How digital payments foster business possibilities 


Consumer – and increasingly business – expectations mean most enterprises have no choice but to adopt a digital payments strategy. But it’s not just a question of keeping up; doing so can also pave the way for entirely new business models and markets. Thoughtworks’ global presence has given its experts a window on how digital payments are driving financial inclusion by bringing previously underserved consumers into the banking fold, and allowing them to transact with enterprises in confidence. This is benefiting societies as well as businesses. 


“Digital payments leave a track record, and that gives people visibility and puts them on the financial map,” says Gandhi. “If you get a bill and make a timely payment, you start becoming creditworthy. That makes it easier to start accessing the mainstream financial system, instead of being forced to use the shadow banking system or money lenders.”


The rise of digital finance has “not just led to inclusion, it’s absolutely created new marketplaces that didn’t exist just five years ago,” says Joshi. “There are whole cottage industries running on digital payments in parts of Africa and Asia that would never have had the opportunity to market and sell on a platform like Amazon. Digital payments have effectively equalized the payment space, and reduced transaction costs for both the customer and business owner by minimizing or eliminating the middle broker or settlement entity. What’s more, a lot of these solutions are local and homegrown. There are still a lot of pockets of the world that have yet to really come online – which means there’s huge potential that’s still untapped.” 


Indonesia, a relatively young country with a rapidly expanding middle class, but where around half the population remains unbanked, is a case in point. The total value of digital payments has surged from just over US$2 billion to almost US$20 billion over the last five years as consumers flock to e-commerce.


Emerging market consumers embrace digital transactions

Source: Bank of Indonesia, Asian Banker 


Gandhi notes underbanked markets are becoming particularly fruitful ground for fintechs, which can harness alternative data sets to extend services to individual and business customers, where banks are still unwilling and unable. 


In assessing a small business for a loan, for example, a traditional bank may only consider the balance sheet. But “fintechs will look at eBay transactions, the reviews you’re getting, what kind of orders are profit generating, and use all that information to decide if it’s actually a very strong business with good latent demand that they can tap into,” Gandhi explains. “They’re able to come in with novel ways of thinking about individual or small business needs, and tap into spaces that might be unprofitable for a larger institution.” 


Kelsall, meanwhile, sees significant potential to mobilize the transparency and safeguards possible with digital payments to impact consumers’ lives for the better. A family may be reluctant to entrust cash to a carer for an elderly relative, for instance, but digital payments can be easily limited and monitored, and therefore become a viable option. 


“The flexibility that payments infrastructure provides allows organizations who are really, very intuitively listening to their customers and looking at the things happening in the market, to identify and answer specific points of need,” he says.   


iii. Choosing when to collaborate or differentiate 


Adopting digital payments can open new doors for businesses, but there are two key considerations organizations should consider before taking the plunge. One is how payments infrastructure will align with commercial strategy. The second is to what extent this infrastructure should be proprietary.  


The multiple examples of banks and even non-financial firms rolling out their own payment solutions may encourage an organization to consider the same, given the potential to lock in or learn more about customers. But as Kelsall points out, the reality is that, for most enterprises, payments are not a core competency, and trying to construct a payment system from scratch can prove a resource-intensive distraction from the company’s real mission.



Photo headshot of Ian Kelsall, Product Principal for Banking, Financial Services and Insurance and Fintech, Thoughtworks
“I’d be very wary of an organization attempting to build payments themselves. You really have to think about what you’d be bringing that would be brand new to the market, what would make it successful and whether it’s a niche service.”


Ian Kelsall
Product Principal for Banking, Financial Services and Insurance (BFSI) and Fintech, Thoughtworks


“I’d be very wary of an organization attempting to build payments themselves, simply because of the sheer number of providers out there that already cater specifically to those needs and that have already solved a lot of the problems that the organization would inevitably face,” he says. “You really have to think about what you’d be bringing that would be brand new to the market, what would make it successful and whether it’s a niche service.” 


It typically makes much more sense for companies to choose from the now vast suite of payment solutions already on the market to meet their needs, Gandhi agrees.


“The ecosystem has evolved significantly,” he says. “There are now a lot of ‘banking as a service’ providers and offerings throughout the entire space that you can piece together to offer all kinds of payment capabilities as part of production, and it’s an easy onboarding process for most companies.”



Photo headshot of Prashant Gandhi Principal, Financial Services, Thoughtworks
“There are now a lot of ‘banking as a service’ providers and offerings throughout the entire space that you can piece together to offer all kinds of payment capabilities as part of production, and it’s an easy onboarding process for most companies.”


Prashant Gandhi 
Principal, Financial Services, Thoughtworks



“The good news is that a lot of payments integration work has become very seamless,” adds Joshi. “There are companies out there that provide the common architecture, APIs, payment gateways and standards for things like message exchange that allow the organization to scale capabilities easily, and a lot of choices because it’s a competitive landscape. Though some customization needs to be done depending on your use case, it’s almost plug-and-play. Ultimately your choices will come down to what your business logic is, what you want to embed with a payment gateway, how you want to harness that data and what sort of data you want to keep. It’s a business call, not a technology call.” 


“Organizations need to go back to basics and define what constitutes payment for their business,” says Kelsall. “Is it the point of sale – that checkout experience? Is it the exchange of funds? Is it the actual financial product that might sit behind some of that? There are multiple layers that may or may not be relevant.”


For an online retailer building a presence, it’s completely feasible to turn to a bundled solution like Shopify that provides “comprehensive infrastructure for merchants using its platform, from protecting their presence on the internet, to payment processing and financing solutions,” says Gandhi.  A bank aiming to innovate in the payments space, by contrast, is more likely to require a full platform refresh.  


Another important factor for businesses to consider is future growth plans. 


“Global organizations have to be cognizant of differing regulatory standards across borders, and choose partners who are deeply familiar with the local regulations of countries they intend to operate in,” notes Joshi. “However there’s no reason to limit yourself to one payments service provider. You can work with multiple players, depending on where your payments are, what your KPIs are and where your systems are running.”


Weighing and striking the right balance between business goals, the client base and the realities of the core technology stack will help organizations decide which payments capabilities should be embedded – and where to forge partnerships with external providers. 


Finding a payments partner may be easy, but partnerships need to be based on the organization’s specific needs and context to succeed. For instance, in the case of a new business planning to integrate digital payments, the method – and speed – at which payments processed by a third party are passed on to the merchant will be a top concern. 


“As competition among the growing number of providers increases, the criteria for selecting partners have shifted from technology-driven to business-driven,” says Joshi. “Cost, service levels and geographical coverage are becoming the deciding factors.”


Finally, given that payments may touch on everything from finance to sales and product development, it’s important to define how payments are structured and ‘owned’ within the organization to ensure a united front. This applies especially when the business is contending with structural or technological silos. 


“As with any transformation, large organizations will need to make cultural as well as technological changes when building or adopting digital payment solutions,” says Joshi. “Particularly in large enterprises, multiple payments capabilities may be embedded across the company, which can prevent the formulation of a coherent payment strategy or product that’s truly customer-focused.”


iv. Security, compliance, and better customer experience  


Whether an organization takes a build or buy approach, the sensitivity of customer payments data means handling it safely and in compliance with regulations has to be top of mind from the very beginning. 


“Doing data security right on day one is paramount because the cost of integrating it later is exponentially higher,” notes Joshi. “The best safeguard against data security risks is to instill a security mindset in everyone – from internal teams to partners, and importantly customers.”   


One study by PwC showed rules around data privacy and digital identities, as well as the proliferation of regulations across various markets, are some of the top issues worrying firms in the payment space. 


Where firms are bracing for payments regulation impact

Source: PwC


“In compliance it’s important to be proactive,” Joshi says. “Instead of simply adhering to local laws, companies should go a step beyond. Having a compliance mindset rather than treating it as a box to check and moving on will enable the enterprise to scale faster and better deal with new requirements as they emerge.” 


The first line of defense for organizations is taking the time to analyze what data they’re collecting, why they want it, and the associated risks. 


“In the past, banks had a tendency to capture a large amount of information from places like point of sale terminals without thinking through its utility or governance,” notes Gandhi. “When collecting data it’s important to ask questions like how is the data stored? Is there any personally identifiable information collected that poses certain compliance risks?”


Setting defined policies and processes for every point of interaction with data not only ensures the organization remains on the right side of customers and regulators. It also gives a business more confidence to put the data to good use, whether to conduct internal analysis and customer profiling, or for actual monetization. Payments data is particularly valuable – and sensitive – because of the depth of customer insight it provides. 


Photo headshot of Ian Kelsall Product Principal for Banking, Financial Services and Insurance and Fintech, Thoughtworks
“Payments data is a much better indicator of a consumer’s behavior than search for example, because of its richer intent.”


Ian Kelsall 
Product Principal for Banking, Financial Services and Insurance (BFSI) and Fintech, Thoughtworks


“A lot of the intent marketing that was done previously was often hard to validate as there was the question of where a transaction went in the end and what to suggest as the next best action based on that,” notes Kelsall. “Payments data is a much better indicator of a consumer’s behavior than search for example, because of its richer intent.”


While payments data opens up powerful marketing opportunities, it also raises concerns on consumer data rights protection as behavior becomes even more trackable. Regulators are responding with stipulations like Australia’s Consumer Data Right (CDR), which cement consumer ownership of personal data and control over its use. 


“Organizations are going to need to recognize – if they are going to use payments data or share that data with third parties – they need to be transparent with their customers about how it’s being used and the reasons for it, '' Kelsall says. “Generally, it’s incumbent on the organization to make sure that information from the data trail generated is secure and is only being shared with the consumer’s explicit awareness.”


Although companies that use external payments providers may not have direct control over their security infrastructure, they have significant leeway to ensure their partners have sound practices in place. 


“With external providers, you're only outsourcing the burden of what you don't know,” notes Joshi. “But you can never stop worrying about security even if you have outsourced a big component of your security infrastructure. The key then is to ask your provider in-depth questions.” These can run the gamut from the standards that are in place, to how security breaches and system outages are handled. 


Concerns about privacy and security notwithstanding, there is no doubt that the proliferation of digital payment methods is enabling companies to deliver enhanced, and more inclusive, customer experiences. At the same time, the many sophisticated options available have also set the bar incredibly high when it comes to customer expectations in the payments space. 


This means that versus other customer interactions, “there's a much greater risk of organizations providing a customer experience that does not align with what the customers are used to,” says Joshi. “If an experience is not seamless, then the chances are no matter how good the technology is, the customer will go away. And with the amount of competition in the space there's no reason for them to come back.”


Photo headshot of Nikhil Joshi Director, Financial Services, Thoughtworks
“If an experience is not seamless, then the chances are no matter how good the technology is, the customer will go away. And with the amount of competition in the space there's no reason for them to come back.”


Nikhil Joshi 
Director, Financial Services, Thoughtworks


“Instantaneous payments – which used to be a nice to have just two years ago – is the baseline now,” Kelsall notes. “Increasingly, that needs to be a core feature, a hygiene factor in the build.”


The trend of payments becoming ever smooth and invisible means the focus has to stay on how payments enhance convenience for the customer – not the organization or merchant, notes Gandhi. “If you look at embedded finance and buy now, pay later schemes, they are actually all about customer convenience.”


Embedded finance – the trend of non-financial companies offering customers access to credit and other financial services through their tech platforms – is aimed at “making the pain of payment disappear,” agrees Kelsall. “Consumers have already accepted that they can buy something without an explicit payment action and have become used to purchasing products as a service.” 


This is laying a foundation for all kinds of new financial services and solutions, such as the ability to split payments between mechanisms and people, digital payment vouchers deployed by some governments as a form of economic stimulus and ‘income smoothing’ options that “enter the realm of credit, but in a different medium,” Kelsall notes. 


Developments like these show how customer-centricity is reaching an apex in digital payments – a benchmark enterprises should keep in plain view as they explore and build in the space. 



v. A cash and card-free future? 


In the short term, ever more invisible payments and an expanding list of payment options will continue to take center stage as seamlessness and convenience become table stakes. 


“Digital payments will trend towards giving consumers more ownership over the point of transaction, deeper integration of biometrics, and allowing consumers to receive goods without making an explicit payment because they have already given a mandate for merchants to do this in the background,” Kelsall says.


“We can expect a greater proliferation of services in the next few years – but beyond that, we will see a maturity curve where businesses consolidate and technologies converge,” says Joshi.


Over the longer term, Thoughtworks experts agree the development of more purely digital payment-linked experiences such as the metaverse, non-fungible tokens (NFTs) and crypto is a space to watch. 


“Organizations will start to analyze the purchases that take place in these fully digital experiences, how payment is being facilitated, and the players involved, as a window on future trends,” notes Kelsall. “These are not broadly adopted now but with younger demographics starting to use and become very comfortable with these digital experiences, they will start to bleed into the rest of society over the next 10 years.”


Gandhi notes that the rise of cryptocurrencies, which gained popularity because of their ability to act as an inflation hedge, is significant from multiple perspectives. “Due to the emergence of digital goods, many countries are building central bank digital currencies (CBDCs) which are digital representations of money,” he explains. “The other angle is the ability to make minute payments with cryptocurrency, which then gives rise to more invisible payment possibilities.”


Indeed research shows questions surrounding the future of cryptocurrencies have done little to slow their adoption, and their use in transactions as well as stores of value. A significant proportion of millennials see cryptocurrencies displacing credit and debit cards as well as cash, and are regularly using these currencies to purchase everything from mobile top-ups to travel and lifestyle products.


The future of payments: Cash and credit cards seen making way for crypto


Millennials who think cryptocurrencies are replacing debit/ credit cards

Source: Deutsche Bank


These forces mean stores of value, such as crypto wallets, “will also become much more fungible and turn into points of purchase on-demand,” Kelsall adds. “Some neobanks are starting to offer products that allow consumers to put money in exchange-traded funds that will convert to a point of purchase if they need access to those funds.”


“The use of blockchain is also expected to become more prevalent in the payments ecosystem given its ability to reduce the latency of settlements and enable secure transactions,” says Joshi. With blockchain, the burden of implementing a SWIFT network for transactions is removed – which could enable startups to scale more easily and compete with banks,” Joshi notes.


In a digital payments space teeming with opportunities and new developments, payment providers that want to stand out will have to stay focused on their value propositions when considering the innovations they’re bringing to market. Similarly, when evaluating relevant use cases for new payment solutions, companies should aspire to do things differently and more effectively, rather than simply create their own version of a solution already on the market, or digitize existing processes. 


In this, the payments strategy should mirror and contribute to the broader product innovation strategy. “Companies need to think carefully and be clear about what they are providing, what distinguishes it and why it is the best,” says Kelsall. “Competing can’t just be rushing to keep up, or a race to the bottom – it has to be based on creating something new and of value.”




To hear more on the future of digital payments, check out our Pragmatism in practice episode here.


Photo headshot of Ian Kelsall Product Principal for Banking, Financial Services and Insurance and Fintech, Thoughtworks
“Companies need to think carefully and be clear about what they are providing, what distinguishes it and why it is the best.”


Ian Kelsall 
Product Principal for Banking, Financial Services and Insurance (BFSI) and Fintech, Thoughtworks

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